Who pays the 3.8% net investment tax?
The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts.
As an investor, you may owe an additional 3.8% tax called net investment income tax (NIIT). But you'll only owe it if you have investment income and your modified adjusted gross income (MAGI) goes over a certain amount.
A Medicare surtax of 3.8% is charged on the lesser of (1) net investment income or (2) the excess of modified adjusted gross income over a set threshold amount. The threshold is $250,000 for joint filers, $125,000 for married filing separately, and $200,000 for all other filers.
If your income is high enough to trigger the NIIT, shifting some income investments to tax-exempt bonds could result in less exposure to the tax. Tax-exempt bonds lower your MAGI and avoid the NIIT. Dividend-paying stocks are taxed more heavily as a result of the NIIT.
Those who are subject to the tax will pay 3.8 percent on the lesser of the following: their net investment income or the amount by which their modified adjusted gross income (MAGI) extends beyond their specific income threshold. Net investment income typically includes the following: interest. dividends.
For investment companies, this is the amount of income left after operating expenses are subtracted from total investment income. The net investment income tax went into effect in 2013 as a means of raising revenue to fund the Affordable Care Act.
Investment income may also be subject to an additional 3.8% tax if you're above a certain income threshold. In general, if your modified adjusted gross income is more than $200,000 (single filers) or $250,000 (married filing jointly), you may owe the tax. (These limits aren't currently indexed for inflation.)
Attach Form 8960 to your return if your modified adjusted gross income (MAGI) is greater than the applicable threshold amount. Use Form 8960 to figure the amount of your Net Investment Income Tax (NIIT).
All About the Net Investment Income Tax
More specifically, this applies to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) surpasses the filing status-based thresholds the IRS imposes. The NIIT is set at 3.8% for 2023 and 2024.
Section 1411(a)(2) imposes Medicare tax for each tax year on an estate or trust equal to 3.8% of the lesser of: (1) The estate's or trust's undistributed net investment income. Summary of when no tax is due.
How do I avoid NIIT on my rental property?
Passive income from rental property that would otherwise be subject to the NIIT is recharacterized as non-passive if you rent the property to a business in which you materially participate. In other words, income from self-rentals is not included in net investment income.
Make additional retirement account contributions.
MAGI is reduced by contributions to certain retirement accounts. If you are vulnerable to the NIIT and you have extra cash on hand, it makes sense to maximize your contributions to tax-advantaged retirement accounts, including 401(k)s, SEP IRAs and traditional IRAs.
In general, net investment income includes, but is not limited to: interest, dividends, capital gains, rental and royalty income, and non-qualified annuities. Net investment income generally does not include wages, unemployment compensation, Social Security Benefits, alimony, and most self-employment income.
This net investment income tax also applies to certain trusts and estates. It does not apply to corporations and other “active” businesses. It does not apply to trusts associated with IRAs or pension plans.
| Filing status | MAGI threshold |
|---|---|
| Single | $200,000 |
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
The gain from the sale of rental property is also subject to NIIT unless the rental activity is part of an active trade or business.
However, with proactive planning, you may be able to reduce the amount you owe on your 2024 federal income tax return. The 3.8% NIIT is applied to the lesser of: The amount by which your modified adjust gross income (MAGI) exceeds the applicable threshold, or. Your net investment income.
It's important to note that retirement accounts alone won't subject you to the NIIT. IRC Section 1411(c)(5) carves out and specifically exempts taxable distributions from any retirement accounts from the NIIT. This includes 401(k)s, IRAs, 403(b)s, 457(b)s, and even Roth IRA conversions!
Because gain from the sale of personal goodwill is income from a personally developed intangible asset that is not passive income, and, generally, income from personal service activities is not passive, the gain from the sale of personal goodwill should not be subject to the net investment income tax.
This means right now, the law doesn't allow for any exemptions based on your age. Whether you're 65 or 95, seniors must pay capital gains tax where it's due.
How does investment tax work?
Often, investment income includes interest and dividends. The income you receive from interest and unqualified dividends are generally taxed at your ordinary income tax rate. Certain dividends, on the other hand, can receive special tax treatment, which are usually taxed at lower long-term capital gains tax rates.
Net investment income is calculated by adding up all of the income you earned from investments in the past tax year and subtracting any related expenses.
If you earn income from any of your investments this year, you may have to pay the net investment income tax, in addition to the regular income taxes you owe. You won't know for sure until you fill out Form 8960 to calculate your total net investment income.
The $3,000 loss limit is the amount that can go against ordinary income. Above $3,000 is where things can get a little complicated. The $3,000 loss limit rule can be found in IRC Section 1211(b). For investors who have more than $3,000 in capital losses, the remaining amount can't be used toward the current tax year.
Depending on the level of involvement in the S-corporation, the selling shareholder(s) may also be subject to the 3.8% net investment income (NII) tax on passive activity. If a shareholder can show active participation in the company, then the gain is exempt from NII tax.
